Subbarao joins Chidambaram to demand reduction in lending rates

Finance minister P Chidambaram got the backing of Reserve Bank governor D Subbarao, perhaps for the first time, when the latter said the RBI is also ''very conscious'' of the need for banks to pass on the benefit of rate cuts to customers.

A day after Chidambaram nudged banks to cut base lending rates in line with policy rate cuts effected by the RBI, Subbarao also said lending rates need to be low to attract investments.

"When the Reserve Bank calibrates its short-term policy interest rate, the expectation is the monetary transmission will take place and the banks should respond by calibrating the lending rates. Some banks have responded, some have not.

"There are several reasons for monetary transmissions not being agile as it should be. So, in a way, the Reserve Bank is conscious of the need of monetary policy transmission taking place. Because it is important that banks respond by calibrating their lending rates in order to attract investments," the governor said on the sidelines of RBI's board meeting in Chennai.

While the RBI is always supportive of growth, he said, when deciding on monetary stance the central bank will have to balance it with inflationary concerns as well.

"Well, the objectives of monetary policy are price stability, growth and financial stability as we have said several times. And growth also subsumes employment generation. The challenges for monetary policy are to balance between these objectives," Subbarao said.

While some public sector banks have responded to finance minister P Chidambaram's call to cut base rate, tight liquidity remains a constraint for most banks.

Also, with still high deposit rates, banks are not ina position to cut lending rates without effecting a reduction in deposit rates as well. But that would affect their already tight liquidity. Banks are in a dilemma.

RBI, meanwhile, is expected to announce a 0.25 per cent reduction in the cash reserve ratio in its 30 July monetary policy review in a bid to revive sagging economic growth.

"We expect the RBI to cut CRR by 25 basis points to revive growth on July 30 even if the rupee volatility prevents it from cutting repo rate," a Bank of America-Merrill Lynch report said on Friday.

RBI has reduced short term lending rate or repo rate by 1.25 per cent since 2012. However, commercial banks have reduced their rates only by 30 basis points.

India's economic growth rate hit a decade low of 5 per cent in 2012-13 while credit growth declined to 15.62 per cent from 17.76 per cent in 2011.